Why Self-Driving Cars Will Be Baidus Next Big Opportunity

Chinese internet giant Baidu (NASDAQ: BIDU) is desperately looking for its next big play as growth in its core business slows down. Morgan Stanley analysts recently said that Baidu won't be delivering much upside this year as its growth will be restricted by tight advertising laws in China. Also, as the likes of Tencent Holdingsraise their content game by investing in online video, Baidu will find it difficult to boost revenue.

As a matter of fact, Baidu revenue has now started shrinking, and it needs to find its next big home run prospect to push forward. This is the reason why Baidu is aggressively looking to tap the potential of self-driving cars. But will it find success in a market that's getting increasingly crowded?

Baidu has set lofty ambitions for itself in the self-driving car space as its first autonomous car is expected to hit the market in the next couple of years. What's more, Baidu believes that it will be able to mass produce self-driving cars starting in 2020. This gives Baidu three years to ramp up its technology and production, which seems like an aggressive timeline considering that it just started testingautonomous vehicles on the road in Dec. 2015.

However, the company began working on autonomous vehicle technology back in 2013, and in less than two years, it was able to complete a comprehensive road test along a 19-mile route. This made Baidu the first company in China to have "demonstrated full autonomy under mixed road conditions", in its own words. Google parent Alphabet, by comparison, had started testing its self-driving technology in 2009.

Baidu has moved at such great speed in the autonomous vehicle space due to certain key partnerships and progress in the field of artificial intelligence, or AI. Baidu started making an aggressive push in AI by hiring former Alphabet executive Andrew Ng back in 2014 to head its AI lab in Silicon Valley.

Then, in Oct. 2016, Baidu set up a $3 billion fund to invest in mid-to-late stage internet companies focused on AI, augmented reality, and virtual reality. Last month, Baidu hired former Microsoftexecutive and AI expert Qi Lu as its Chief Operating Officer. Baidu CEO Robin Li had the following to say about the latest hire:

This aggressive expansion into AI has been one of the reasons behind the rapid development of its self-driving car as well. Baidu has harnessed the power of AI and deep learning to develop its AutoBrain self-driving platform, which is at the center of its autonomous technology.

The AutoBrain software can detect a vehicle's position accurately down to a few centimeters using Baidu's maps that record road data in 3D, and then uses environmental perception and decision-making to guide the self-driving car.

Apart from developing its own technology, Baidu is partnering with the likes of NVIDIA (NASDAQ: NVDA) to accelerate its progress. In September last year, Baidu teamed up with the GPU-maker to develop a self-driving operating system. This system will provide algorithm-driven inputs based on Baidu's mapping technology to NVIDIA's supercomputer platform, which will then provide navigation data to autonomous cars.

Now, Baidu and NVIDIA have both been using artificial intelligence in order to develop their self-driving technology. This is why the partnership should reap benefits in the long run as the companies gather more data by driving on public roads, which will eventually contribute toward the development of their operating system.

Looking at the business side of things

One of the best things about Baidu's autonomous car project is that it hasn't lost sight of the business potential. While partnerships with the likes of NVIDIA will help it enhance its autonomous technology, other partners will allow Baidu to tap a huge self-driving market in China.

At CES 2017, Baidu announced that it is teaming up with Chinese state-owned automotive company BAIC. The two companies will showcase a BAIC-built self-driving car that will be powered by Baidu technology at the Shanghai auto show in April. Additionally, Baidu and BAIC will start testing a self-driving car with Level 3 autonomy by the end of the year.

Level 3 autonomy means that the driver will have to be present inside the vehicle, but critical safety functions can be completely shifted to the car. This means that the car will require the intervention of the driver only when necessary. From Level 4 onwards, the car does not require a driver at all, which means that Level 3 autonomy is the highest autonomous level that can be achieved without going fully driverless.

Now, the Chinese government plans to make 10% to 20% of the cars on the country's roads highly autonomous by 2025, which indicates Level 3 autonomy. Additionally, China expects that 10% of its vehicles will achieve full autonomy by 2030. Forbes reports that China's auto sales are expected to hit an annual level of 40 million units in 2025, which means that at least four million cars will carry self-driving capabilities.

So, Baidu's partnership with BAIC to develop a driverless vehicle for the Chinese market is a smart move from a long-term perspective. BAIC is a Chinese government-owned enterprise with annual car sales of 2.85 million units in 2016 and a market share of 10.2%. Therefore, it has the required capacity to mass produce vehicles on a large scale in China.Since Baidu is an internet company with no expertise in automotive manufacturing, it needs this kind of partner.

With the help of BAIC, Baidu can stick to its aggressive timeline of mass producing self-driving cars by 2020. This puts the Chinese search giant on track to profit from the government-led goal of putting millions of cars with autonomous capabilities on the road by 2025.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, and NVIDIA. The Motley Fool has a disclosure policy.